Q1 2025 OSI Systems Inc Earnings Call
Thank you for standing by and welcome to the OSI Systems First Quarter, 2025 Conference Call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
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Speaker Change: As a reminder, today's program is being recorded and now I'd like to introduce your host food today's program, Alan Edrick, Executive Vice President and Chief Financial Officer of OSI. Please go ahead there.
Speaker Change: Good morning and thank you for joining us. As said, I'm Alan Edrick, Executive Vice President and CFO of OOE of OOE of OEOE of Sight Systems.
Speaker Change: and I'm here today with Deepak Chopra, Ourside President and CEO.
Speaker Change: Welcome to the OSI systems, the Skull 25 first quarter conference call. We are pleased that you can join us as we review our financial and operational results.
Speaker Change: Earlier today, we issued a press release announcing our fiscal 25 first quarter financial results.
Speaker Change: Before we discuss these results, however, I would like to remind everyone that today's discussion will include forward-looking statements and the company wishes to take advantage of the safe-arbitant provisions of the private securities litigation reform act of 1995 with respect to successful-advocance statements.
Speaker Change: All forward-looking statements made on this call are based on currently available information. In the company undertakes no obligation to update any forward-looking statement based on subsequent events or new information or otherwise.
Speaker Change: During today's call, we will refer to both Gap and NonGap Financial Measures when described in the company's results.
Speaker Change: For further information regarding non-gap measures, and comparable gap measures of the company's results, and a quantitative reconciliation of those figures, please refer to today's earnings press release.
Speaker Change: I will begin with a high level summary of our financial performance for the first quarter of fiscal 2025 and then turn the call over to Deepak for a discussion of our business and our operational performance.
Speaker Change: We will then finish with more VTL regarding our tenets results.
Speaker Change: and a discussion of our updated outlook for fiscal year 25.
Speaker Change: Bottle Wing Art fiscal 24th on the answer performance featuring record revenues in non-gap EPS.
Speaker Change: We started this once in 25 by posting record key one financial results. Led by the security division, resulting in robust year-over year revenue growth and a significant increase in year-over year operating income.
Speaker Change: We are encouraged by the momentum reflected on our key wonderful dance performance.
Speaker Change: So I'll start with a high-level summary of about this will 25-2 end results.
Speaker Change: First, revenues increase 23% year over year to a Q1 record of $344 million.
Speaker Change: Driven by the performance and our security division, where a few one revenues were up 36% year over year.
Speaker Change: Second, the significant revenue growth led to record Q1, non-gap, adjusted earnings per share of $25.
Speaker Change: Third, bookings were against solid and we ended the quarter with a backlog of approximately 1.8 billion.
Speaker Change: I will help care back while, excuse me, our healthy backlog in robust pipeline of opportunities provide good visibility going forward.
Speaker Change: 4.
Speaker Change: We completed a convertible debt financing in July raising gross proceeds of $350 million which reduced our weighted average cost of borrowings and was immediately agreed with. Concurrent with this transaction, we repurchased approximately 531,000 shares of our common stock.
Speaker Change: and finally, in September we completed a strategic bolt-on acquisition in our security division.
Speaker Change: While the acquired business did not significantly enhance our C1 revenues, this deal is expected to be the fiscal 2025 non-Gap earnings per share.
Speaker Change: Before guiding more detail into our financial results and discussing the updated fiscal 25 outlook, I will turn the call over to Deepak.
Deepak Chopra: Thank you, Alan. And good morning to everybody and afternoon.
Deepak Chopra: and pleased with the company's robust fiscal 2025 first quarter performance.
Deepak Chopra: As Alan mentioned, we achieved an impressive 23% revenue growth leading to a higher year over year operating margin.
Deepak Chopra: We close the quarter with a backlog near all the high of $1.8 billion in our optimistic of the remainder of this quarter to $2.25 and beyond.
Deepak Chopra: So let's dive into the performance and highlights of each of our three divisions for the first score, baining with the security divisions where Q1 revenues were up 36% year over year, resulting in increased off-delining projects.
Deepak Chopra: Vortzor Security bookings were solid. During the quarter, we continue to deliver on both and border security initiatives with Mexico's Defense Agency Sedena.
Deepak Chopra: on the 5 million dollar plus contract and with the other international customer on the 200 million dollar contract.
Deepak Chopra: in Edition.
Deepak Chopra: Shortly after the quarter end, the announcement of operations of a turn-to-screening services in Uruguay, utilizing our cargo and vehicle inspection systems along with proprietary search stand integration platform.
Deepak Chopra: We would also provide on this content on going management training, equipment maintenance, and support as part of the Uruguay contract.
Deepak Chopra: The worldwide program now joins a list of a longstanding successful multi-year turn-to-year projects in Purodico, Albania and Guatemala, and serves as further evidence.
Deepak Chopra: for potential customers of the breadth of capabilities to manage large-scale security programs in various parts of the world.
Deepak Chopra: During Q1, we had several wins in security.
Deepak Chopra: and announced these during the quarter. First,
Deepak Chopra: 17 million international order to provide EGLP 60 high energy drive through cargo and vital inspection systems.
Deepak Chopra: and T60 trailer mounted vehicle inspection systems including maintenance, service and support.
Deepak Chopra: 2. It's 26-per-end-dollar services order from an international customer to maintain and service its existing install base of cargo and vehicle inspection systems.
Deepak Chopra: Third, 10 million are older from yet another international customer.
Deepak Chopra: is providing the Z-backstatt-rewind, Z-B-V, mobile cargo and vehicle inspection systems.
Deepak Chopra: Including training, service and support and finally, domestically we announced a contract.
Deepak Chopra: of Order of about 27 million dollars for maintenance, services and technology supports.
Deepak Chopra: [inaudible]
Deepak Chopra: The agreement contains potential options for order stodling up to 117 million over a three-year period.
Deepak Chopra: In aviation, we continue to make progress on an existing international airport project awards. As airports expand and upgrade existing infrastructure, especially in Europe, Middle East and Latin America.
Deepak Chopra: Our overall activity at airports and air cargo facilities continues to be robust.
Deepak Chopra: We have a good pipeline. We are also focused on developing new offerings for airport and air cargo customers such as providing employees, screening solutions for these customers.
Deepak Chopra: In some instances, these could be opportunities for complete turn-toe services or hardware sales with remote monitoring services, sustainability.
Deepak Chopra: has Alan mentioned during the first quarter of his 25, we acquired a US based company.
Deepak Chopra: that provides 5 power radio frequency based transmission and amplification solutions.
Deepak Chopra: for Critical Military Communication, Space Communications, Navigation and Surveillance Applications, both in the US and International Customers.
Deepak Chopra: Lyker Company's legacy offerings, these products help provide security and safety for people and critical infrastructure.
Deepak Chopra: We work with numerous defence and security agencies that utilize this technology in communication and surveillance solutions.
Deepak Chopra: In summary, this acquisition adds proven radio frequency-based technology and products to our portfolio, allowing us to leverage further our global manufacturing sales and service support infrastructure.
Deepak Chopra: Over all, the security division had a strong start in pistol 2020-25 and we look forward to security again achieving a high level of performance to the balance of 25 and beyond.
Deepak Chopra: Moving to the Optolachronics and Manufacturing Division, Optor reported revenue of 98 million, including in-treat company sales to reach a new first quarter record.
Deepak Chopra: While delivering solid profitability.
Deepak Chopra: We saw notable strength and growth in a flex circuit's product line.
Deepak Chopra: Many of our customers for flex circuits are from consumer tech and advanced medical device industries.
Deepak Chopra: We also have many customers who are leading OEMs in the pencil electronics. To that end, we announced a 5 million order for advanced optical sensors that the customer will integrate into its complex navigation and guidance systems.
Deepak Chopra: I should note that in order of this side is relatively large for this division.
Deepak Chopra: Our operations in Mexico, which we began at the end of Q2 last year, are ramping up as we continue to introduce our existing and potential customer-based to its capabilities and the net benefits of near-showing.
Deepak Chopra: The uncertainty and risk for OEMs.
Deepak Chopra: with China's centric supply chains have never been more significant and are global manufacturing presence in US, Mexico, UK, India, Indonesia and Malaysia, provides their viable alternatives to reducing these risks.
Deepak Chopra: Finally, onto the healthcare division.
Deepak Chopra: Q1 saves were down slightly year over AL, due to challenging market conditions, as we mentioned before. Still, the division delivered improved profitability and part due to a more streamlined infrastructure.
Deepak Chopra: To support our customers, this division continues to offer innovative solutions and market its differentiation offerings like the Rothman in that space to addictive analytics software and safe and sound patient alarm management software.
Deepak Chopra: We are focused on developing a next generation of patient-munting solutions and continue to progress accordingly with an improved cost structure and a growing opportunity pipeline. We expect health care performance to improve over the balance of the system's 25.
Deepak Chopra: in Subway.
Deepak Chopra: With a significant backlog and a clear pass to near-term opportunities, we are increasingly confident about our process for fiscal 2025 and beyond.
Deepak Chopra: A Strategy of being a vertically integrated supplier.
Deepak Chopra: with a flexible and responsive global footprint.
Deepak Chopra: that meets his customers' needs while we continue to invest in and acquire strategic technologies and capabilities as created a robust business with a long-term sustainable growth potential.
Deepak Chopra: Finally, as you know.
Deepak Chopra: I have announced my retirement from my position as Chief Executive Officer of the Company at the end of calendar 224. Though I will remain as Executive Chairman of the Board.
Deepak Chopra: in 1987, we laid the foundation for what would become OSI systems.
Deepak Chopra: Starting as an optical sensors in company and embarked on a new chapter by the old public in 1997.
Deepak Chopra: From the beginning, our mission has been unwavering in deliver essential components and systems that enhance the safety and health of society.
Deepak Chopra: with the season expertise of our current OSI management team and confidence in our ability to ascend to even more significant achievements.
Deepak Chopra: We expect to announce a successor, before the end of the court.
Deepak Chopra: and Ed Sach.
Deepak Chopra: This is expected to be my last earnings call.
Deepak Chopra: As CEO and it has been my privilege to lead the company over the past years and I look forward to supporting OSI's journey with Ahead.
Deepak Chopra: with that. I turn the call over to Alan to talk in more detail about our financial performance and updated guidance before opening the call for questions. Thank you.
Alan Edrick: Thank you, Deepak.
Alan Edrick: and now I will review in greater detail of the financial results for the fiscal 25th or 1st quarter.
Alan Edrick: Again, 21 revenues, ruptu 23%, compared with revenues in the first quarter of the prior fiscal year.
Alan Edrick: This increase was primarily driven by our largest division of theory.
Alan Edrick: The 36% year over year increase in Q1, security division revenues, 1th lead by strong growth in our current Olympic influence of action product sales.
Alan Edrick: As well as solid growth in our aviation and shift point products there. Q1 revenues included continued shipments from the $200 million plus cargo contract announced in January 23 and also from the $500 million plus cargo contract announced in March 23.
Alan Edrick: In addition, year-over-year security divisions services revenues increased 11%.
Alan Edrick: The third party of the sales was solid.
Alan Edrick: Delivering an 8% year over your increase driven by growth from our new Mexico operations.
Alan Edrick: We continue to see a certain ophthalochostomers adjusting inventory levels and ordering patterns, which we anticipate seeing through the second quarter of fiscal 25 and perhaps a little beyond.
Speaker Change: and Revenue's in the Health Division in the first quarter 25. As Deepak mentioned, we're roughly the same as Keywater Revenue's in the last fiscal year.
Speaker Change: The pistol 2521 gross margin of 35.3% was in line with a 35.4% gross margin in Q1 of last fiscal year, and up sequentially from the 32.1% in Q4, a pistol 24.
Speaker Change: Our gross margin will generally fluctuate some period, based on revenue mix, and volume, impacts with changes in supply chain costs and inflation generally, among other factors.
Speaker Change: Living to operating expenses.
Speaker Change: We continue to work diligently across each of our divisions to improve efficiency and manage our SGNA
Speaker Change: Q1 SGA expenses were 72 million or 21.0% of sales compared to 60 million or 21.4% of sales in Q1 of the prior year.
Speaker Change: The year-old dollar increase in costs resulted primarily from higher compensation costs and support of the company's growth.
Speaker Change: and the leaky thing of the US dollar, creating unfavorable foreign exchange rates.
Speaker Change: Research in development expenses in Q1 at 2.25 or 17.8 million or 5.2% of revenues compared to 15.9 million or 5.7% of revenues in the same car year quarter.
Speaker Change: We continue to dedicate considerable resources to R&D, particularly in our security and our healthcare divisions, as we will be focused on innovative product development, which we view as by the ultralight to the long-term success of our business.
Speaker Change: We record 1.2 million of restructuring and other charges into one at fiscal 25 compared to 0.5 million in the same quarter before I get.
Speaker Change: You've been the interest in taxes.
Speaker Change: Net interest to another expenses in Q1 increased to 7.4 million in fiscal 25 from 5.7 million in fiscal 24 for a nearly due to a higher amount of borrowings.
Speaker Change: Partially offset by the favorable impact of the convertible notes issued during Q1 which will partially use to repay higher cost boroughs.
Speaker Change: Our reported effective tax rate under GAAP was 21.9% in Q1 at fiscal 25 compared to 23.4% in Q1 last year.
Speaker Change: Excluding an impact as a street tax item, our normalized detective tax rate, which is the rate reflected in our calculation of non-gabbing just to BPS, was 24% into one of the discolored 25 compared to 25.8% in Q1 of 24.
Speaker Change: and will now turn to a discussion of our non-gap adjusted operating margin.
Speaker Change: Overall, or adjusted operating margin in the first quarter of fiscal 25 increased to 10.3% from 9.6% into what it fiscal 24.
Speaker Change: The Q1 Disco 25 non-gap adjusted operating margin at 14.4% in the security division with up slightly down the comfortable welfare order and included the absorption from notable adverse effects.
Speaker Change: The objective operating margin in our opiotid vision was 12.0% in the first quarter of fiscal 25 compared to 12.8% in last year's Q1.
Speaker Change: Excluding the adverse impact of effects on the observation, the margin was relatively in line year over year.
Speaker Change: The Healthcare Division reported a nominal increase in its adjusted operating margin.
Speaker Change: Moving the cash flow.
Speaker Change: Cashews and operations in the first quarter was 37 million. Primarily in relation to higher inventories, and restructural roles in support of the security divisions revenue.
Speaker Change: Cap X in the first quarter with 7.7 million while depreciation and ambrosation expensive Q1 was 11.5 million.
Speaker Change: With respect to cash flow, I wanted to take a moment to provide some additional accounting insight on our receivables in DSO, both of which are risen primarily due to our significant international security contracts.
Speaker Change: Under DAP, we typically recognize revenue as we ship our deliver products, depending upon the specific contractual obligations.
Speaker Change: The Civil Works, reticulated recognized revenue over time as we complete the construction phase in ultimately installed products.
Speaker Change: On certain contracts, like our significant international security contracts we earlier referenced.
Speaker Change: Billing is triggered by the achievement of certain project milestones.
Speaker Change: which are highly influenced by the customer's timeline and fight off.
Speaker Change: and Seps in unbuild the scene role as reported as we recognize revenue under GAP, but building in the resulting cash collection occurs subsequent to the achievement of the milestone.
Speaker Change: Therefore, the elevated AR and DSO is normal porous for large government contracts. Does not factor into the cash economics of the transactions and is just timing related.
Speaker Change: Our goal is to collect cash as early as we can in the transfer typical build receivables remain strong. As DSO for build receivables is approximately 87 days.
Speaker Change: Re-intestinate operating cash flow could be quite significant in the second half of this year. In the end, potentially even stronger in fiscal 25th.
Speaker Change: Our balance you can follow with net leverage of about 2.3 is calculated under our creative facility.
Speaker Change: A side from 7.5 million of annual required principle retainers under our big turn loan, the bulk of our debt, the shares in fiscal 20 seconds.
Speaker Change: That's mentioned earlier during Q1, we issued 350 million of convertible notes with a Q-Pod on a 2.25%
Speaker Change: 2.3.
Speaker Change: and an initial conversion price of approximately $192.
Speaker Change: The proceeds were used to partially pay down our bank revolver and to purchase approximately 531,000 shares of our common stock, as well as coverage transaction cost.
Speaker Change: This transaction provides enhanced liquidity to capitalize on future strategic initiatives. While simultaneously being immediately a credo given a significant reduction in interest costs, and an introduction in our share account.
Speaker Change: As a result of completion of the terrible notes deal, and personal pay down of our bank debt, and the interest rate swallowing in and entered into approximately two years ago, over 70% of our debt was fixed versus floating at the end of Q1.
Speaker Change: Finally turning the guidance.
Speaker Change: We are updating our fiscal 25 revenues and non-gapedaluted EPS guidance.
Speaker Change: The fiscal year 25, we anticipate revenues and the range of 1.67 billion to 1.695 billion. Increasing our guidance on your revenue growth from a range of 5.3 to 7.2 percent to a range of 8.5 to 10.2 percent growth.
Speaker Change: We are also increasing fiscal 25 non-gap adjusted earnings per due to share guidance, two a range of $9 to $9.30 per share, or $10.7 to 14.4 percent growth.
Speaker Change: This fiscal 25 non-gap diluted heat to the back of the back end, excludes potential impairment with structure and other charges, amazes the required and tangible assets and their associated tax effects, as well as discrete tax and other non-altern edams.
Speaker Change: We currently believe this guidance reflects reasonable estimates.
Speaker Change: The actual impact on the company's financial results of timing changes on the expected conversion of backlogs or revenues, disruptions in the supply chain and inflation is difficult to predict and could vary significantly from the anticipated impact currently reflected in our guidance.
Speaker Change: Actual revenues and non-gap GPS could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings.
Speaker Change: We continue to remain focused on the growth of our businessists.
Speaker Change: We believe our efforts will enable us to continue providing innovative products and solutions.
Speaker Change: We would like to take this opportunity to thank the Global OSI team for its continued dedication and supporting our customers and partners.
Speaker Change: And as a lifelong Dodger stand while we respect the Yankees, I must conclude with the Dodgers. At this time we will open the call to questions.
Speaker Change: Thirdly, and our first question for today comes from the line of Josh Nichols from B-Riley, your question please.
Josh Nichols: Yes, thanks, good job, you're here, Deepak.
Josh Nichols: I guess just looking at this, I want to get a little bit more color. I mean, this is actually usually the season-like slower quarter, particularly in Europe and later several months, but the security...
Josh Nichols: and the other two guys are going to be in the middle of the night.
Josh Nichols: 100 million sequentially I know you knew announced 80 plus million or so of like security in order during the quarter but
Speaker Change: You did have about a quarter of a billion dollars in security revenue. Can you provide just a little bit more granularity on what's been driving that backlog growth overall despite a being a little bit sucily slowish, we kind of touched on.
Speaker Change: Sure, Josh, this is Alan, you know, great question. So, yes, we've seen strength in our security division in your light with sometimes a typically slow-received an recorder on the revenue side.
Speaker Change: We really saw strength across our businesses. We saw the geographies, the Americas, Asia Pacific, and the EMEA region. We saw strength across our product lines and the aviation and the cargo and solutions. So it was really a nice booking score for us, positioning us with an excellent backlog.
Speaker Change: As we look out to the rest of the fiscal 25th in beyond.
Speaker Change: Thanks for the kind of curious you clearly believe the lead horse when you look at security, cargo, vehicle inspection. You did note that you're seeing good revenues as well as opportunities on.
Speaker Change: on aviation and things like that as well, which the opportunity we think.
Speaker Change: to potentially increase size and market share on that piece of the business, where we still probably like a two, then number two, number three player, and so the lead player, like you are on traditional cargo and vehicle inspection systems.
Deepak Chopra: Good question again, this is Deepak here. Definitely we see good pipelines, strong expectations in the aviation and air cargo space.
Deepak Chopra: by Metaly into the International Sector as I mentioned in Latin America.
Deepak Chopra: in Asia and in Europe.
Deepak Chopra: Everywhere there is much more traffic of passengers going which is making the airport to get to the next level of upgrading their systems. At the same time we have said many times before on our calls. Here cargo is a very focus space for us.
Deepak Chopra: and we continue to grow in that business and our idea also is that we want to do something different, innovative, what why said mentioned and toy screening both at peak airports and at air cargo freight facilities.
Deepak Chopra: So all that adds up to an our opinion that that whole area will continue to see growth and we are well positioned into it.
Deepak Chopra: At the same time, I know that people ask us about the US. We are working with TSA and whenever the next replacement cycle comes in, we will be ready.
Deepak Chopra: Thanks, then just last question for me just touching on the acquisition.
Speaker Change: Company adding some RF to the product portfolio. I know you described it as a bolt-on acquisition, so I assume it's not going to be a huge contributor to revenue or EPS for this year, but if you can provide...
Speaker Change: Any additional color on that, and then also expectations in terms of potential synergies, or how you could layer this into your global footprint for sales manufacturing, and potentially ramp up sales or expand margins on that firm.
Speaker Change: Good question.
Speaker Change: has you know that our strategy is that we look at one plus one much more than two.
Speaker Change: This is a strategic acquisition, it's a little different technology, but it fits very well and because the same customers that this company works with, we work with the same customers both domestically and internationally.
Speaker Change: and the supreme being larger.
Speaker Change: We expect that we'll be able to put this together and be able to go after a much broader customer base. And for the same time with our service.
Speaker Change: Support with our manufacturing, it definitely has synergy into it. But more important is to broaden that technology platform, which is what we've been doing for the last decade, and also to broaden that product portfolio.
Speaker Change: I appreciate the Deepak and Congratulations, Adrian.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question comes from the line of Marianna Paraismora from Bank of America. Your question please.
Marianna Paraismora: Thank you so much and Deepak congratulations on the profession of Jeremy and also on the World like partial retirement I guess.
Marianna Paraismora: So my first question is about the pipeline and I understand for competitive reasons you cannot give like a lot of like...
Marianna Paraismora: Granularity into it, but like how should we think about it?
Marianna Paraismora: is the pipeline of opportunities in the next like, like, six months or 12 months. And is there, like, particular, like, I don't know, big contracts there that we should be workforce for, um, real specific regions, like, how should we think about that?
Speaker Change: Hello again, good question, but you also
Speaker Change: On Saturday 2, we have been saying for a long time. We consider ourselves in the cargo space as a leading company.
Speaker Change: We are very much focused on to it domestically with CBP and other state department and other other customers air internationally with the broad base that we have. There's a lot of activity and the other thing that it's...
Speaker Change: The tough to say it, but though as the world becomes more
Speaker Change: Unsafe requires more security awareness and we have the products for that and we have a very broad reach. So we look at this as a very strong pipeline, very strong globally.
Speaker Change: and with our name and our reputation and our current key services and various parts of the world, we definitely get invited to every dance there is.
Speaker Change: So if I were to let me ask it in a different way, if I were to assume about 50% of your backlog is going to convert into the next 12 months. And then the services or pieces of that of the aftermarket that you're going to support is not there. I'm still missing about like around like the fourth of the revenues that you need to still like get into contracts like.
Speaker Change: the how strong is the pipeline compared to that.
Speaker Change: Very strong.
Speaker Change: and all the time we've been saying it, you know, these kind of contracts.
Speaker Change: Take longer years and time, the bigger the side it is.
Speaker Change: So we've been working with these customers for a long time and without reputation and our success and US and Mexico and other places We feel very good about it that these things will mature in a timely fashion.
Speaker Change: More of the key research you're looking at in terms of timing of those opportunities.
Speaker Change: Would you repeat it again? I didn't get the law. What are the key risks that could be lay some of these opportunities?
Speaker Change: Do you research? Deep risk, though, any challenges, yeah.
Speaker Change: What obviously the economy, the world economy is always a potential risk.
Speaker Change: But besides that, you know, time to time, things can change unless they're...
Speaker Change: or something else there, government funding.
Speaker Change: So I don't see any specific risk history speaks for itself.
Speaker Change: We've already added this unrest both in Middle East.
Speaker Change: and the Ukraine Russia area are requirement or pipeline has not weakened.
Speaker Change: We continue to look at it and as I mentioned, as you go what is called the other side of the coin, not security, as you look at what is called people are moving away from China. They want to set up manufacturing in other parts of the world.
Speaker Change: We have the product and the infrastructure to be there for ports and borders for crossings for airports, air cargo. So we'll look at that. We don't look at it as any risk anyway.
Speaker Change: Right, and then let me have double tap into what you just mentioned, but not only from a security point of view, but from the optoelectronics type of opportunity. You mentioned this like $5 million order that you received, could you please give us some color around the demand, especially in the US or the UK, for this type of like Nishi, sensor or electronic.
Speaker Change: Okay, good question. So the reason we mentioned that five minute analysis is significant order. That's in the opto electronic side. Those are components and subassemblies that we make for other OEMs.
Speaker Change: And what we mentioned is that that pipeline is a very reliable pipeline because we are designing to those customers in the medical industry and aerospace industry, the defense industry, consumer industry.
Speaker Change: So, that we have a very good 4 side into that pipeline.
Speaker Change: and our customer base is very strong.
Speaker Change: and our manufacturing global in Malaysia, Indonesia, India, UK that helps us very much in the new facility in Mexico.
Speaker Change: has people start looking at more alternate to China. So that looks like again a good opportunity and a good strong visibility.
Speaker Change: Thank you and last one from me on the receiver boss. Thank you for the color on the unveiled receiver boss.
Speaker Change: When you think about like future contracts, considering these like accounting issues that also that you're...
Speaker Change: I'm actually transferring some of your assets. Like, if there are any way you can, like, request earlier payment or down payment from these international customers in contracts that are these large or how that works.
Speaker Change: Yeah, I'm Ariana, this is Alan, great to three questions.
Alan Edrick: We have very often in the past requested considerable advances in down payments which helped to phrase some of the inventory build up and some of they are. When we can get that we absolutely do. There are certain contracts that go out by RFP where we cannot.
Alan Edrick: really dictate terms, the terms are kind of dictated by the customers in those regards.
Alan Edrick: and if they make good strong economic sense for us to take the contract, even though it might require some adverse cashew oil on a short-term basis, we'll go ahead and proceed with that. But whenever we can get customer advances,
Alan Edrick: or Ken negotiate payment terms that are more favorable to us. We absolutely do. We're keenly in tuning it back.
Speaker Change: Hey, thank you so much.
Speaker Change: Thank you and our next question comes from the line of Madakers from Wells Fargo. Your question, please.
Speaker Change: Yeah, hi, thanks for the question. I get following up on the working capital and thanks for the color.
Speaker Change: Alan Edrick, I guess is there a target we should think about getting back to like these if you're seevable or
Speaker Change: or however you want to frame it, just trying to think if there's an opportunity to get back to kind of the level of receivable who are out two to three years ago, or something in the business, change that maybe that's going to linger a little bit higher than it had been in the past.
Alan Edrick: Yeah, good question, that's Alan.
Alan Edrick: Yeah, we do believe that we can get back to the DSO levels that we had experienced in the past as you mentioned.
Alan Edrick: is a big part of the higher DSO and Undo received the relates to the Big Netsco contract, the Sedana contract that we referred to. And while it's a great contract from us, you know, a sales and our earnings perspective and a great...
Alan Edrick: Beachhead for us. It does have milestones where the cash flow is necessarily as strong. We'll certainly look to get more contracts like that and it's sure that could have.
Alan Edrick: and Adverson Pack and RDSO from Time to Time. But as we look at that from a historical perspective, we operate generally speaking in a relatively narrow band of DSO that is...
Alan Edrick: Much lower than where it is today and we would anticipate kind of returning to that norm in the future.
Speaker Change: Yeah, got it, okay, I guess on a healthcare business, I might, you know, good to see the...
Speaker Change: is a profit up even with Delkone, kind of flat-ish, is there? I guess you talk a little bit of how you get there.
Speaker Change: Should we see similar benefits, Eurovia, Russia, I know there's some seasonality in there but similar kind of optics.
Speaker Change: Yeah, I'm at the Zal and you're right. So, seasonally speaking, the healthcare businesses is lowest in the Q1 and the September quarter. So, Deepak mentioned in the earlier remarks we do expect improvement through the rest of the year. The way we got to stronger profits on...
Speaker Change: Similar, slightly down revenues was also the initiatives that Deepak referred to, where we enhance the operational infrastructure and to fast and cost.
Speaker Change: and the healthcare business for us is the highest contribution margin business. So as revenues go up, there's an awful big toll through, you know, it's offering an income and an even dog. So as we do anticipate revenues being stronger in future quarters, then they were in Q1, coupled with the linear cost trucks that we have, there's a really nice opportunity for a nice margin expansion.
Speaker Change: Yeah, got it. Thanks. I guess if I could squeeze in one more that I guess the acquisition, maybe I missed this, but it is possible that size that or at least I guess if we think about the guidance rate kind of with most of that organic or with sort of the acquisition a big chunk of that.
Speaker Change: Sure, good question, you know, the guidance raised.
Speaker Change: and really factor in our increasing confidence in the outlook.
Speaker Change: was based upon the strong bookings, along with the contributions from the security acquisition that you just mentioned, partly offset on the earning side by forecasted increased in some interest costs and maybe some general conservatism based on marketing uncertainty. But the guidance rates was the factor of the acquisition and increased confidence in our world business.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question comes from the line of Larry Solofram, CJ has security. Here's your question please.
Larry Solofram: Thank you and first of all Deepak Gradulations, I've been almost 10 year run for us working with you and I wish you all, you know.
Larry Solofram: I'm sure you're not going anywhere so fast, but that's the last year. Just following about on that first question I'll just on the act of the issue. I know you increased guidance by 15 cents just...
Larry Solofram: Anymore granularity is the acquisition like half of that increase, you know, most of the increase is trying to get a little more as specifics on that if you can.
Speaker Change: Sure, you know, so you know the acquisition did contribute to both the top-line increase and the bottom-line increase. I mentioned earlier that the acquisition is expected to be a creative to us.
Speaker Change: in fiscal 25. And we probably went a little bit conservative as we get to know the business even better. Yeah, you could say that the increasing guidance was put between the acquisition as well as just a greater confidence in our own organic business.
Speaker Change: and then just to film on the bookings and the back lines, I think it...
Speaker Change: seems like a group out of 100 million from the end of the year over the last quarter. Can you just give us any grandjust specifically, I've been mad at most of it with security? What was the book to build, you know, above one and the quarter with any more color on that?
Speaker Change: Sure, so a good strong booking flight of security business with book to bill. What's approximately one? The quarter, you know, got grew a little bit associated with some acquired backlog as well. Yeah, the growth in the backlog was really entirely attributable to our security division.
Speaker Change: Gotcha. And you mentioned the margin, which I think was up a little bit year over year or roughly flat on just the basis on just the clarity. But I think you did mention there was a few sort of...
Speaker Change: One timeers or nomicone things that I hear that correctly.
Speaker Change: Really the main item that adversely impacted their operating margin, both in security and in off-to, and then of course, which lane to OSI was effects.
Speaker Change: We can go on that had an adverse effect on us, this quarter and not to an insignificant amount. But we are able to absorb all that and still report what we believe to be a very strong result. So I think there's some upside down that, based upon what happens in that direction in the future.
Speaker Change: and I'm the service portion. I know a nice increase. I think revenue grew 11% again. That's mostly secure. I think. So we expect that service kind of piece.
Speaker Change: to continue to kind of perhaps even growth faster than product revenue. Well, assuming you don't get much, you know, hopefully you get big larger deals going forward too. But in the near term, sedepte service piece sort of made you grow faster as...
Speaker Change: is some of these new, clean, still, things come off warranty and whatnot. You get more of that service piece kicked in, is that sort of fair to say.
Speaker Change: and we're talking about Larry's Island, you know, excellent insight and good question. You're right, our product revenue growth was for our superior to our service revenue growth, you know, last year and even in the Q1 as we've been fulfilling some of these large contracts.
Speaker Change: But as we do to tell him and they start rolling off the warranty, the service revenue really significantly increases. So you're right, there's a very good chance that our service revenue grow from nice growing revenue. You'll grow through the balance of the year at a faster clip.
Speaker Change: Then our product revenue. Now of course we hope to get some new, you know, very nice size product revenue deals too and fully expected we will. But you write it, we do expect to see an acceleration of our service revenue growth.
Speaker Change: and then just like and squeeze one more and just on the off tilt piece. I know you mentioned still some inventory management. But actually, I think it looks like if we kind of adjust the off the other end of the second tail, you have some pretty nice growth in the core. I think revenue would have been, you know, grew 8% right all in there. A lot of next-terrain based on food that, you know, which is a pretty nice growth rate. You expect that.
Speaker Change: [inaudible] And he's there, anything to read into that.
Speaker Change: Sure, it's Alan again. So good questions, sort of two things on the optimum. On the revenues, you're right, the 8% external revenue growth
Speaker Change: was fantastic. I think we're still seeing some
Speaker Change: Inventory right sizing and corrections by our customers, so I think that number will moderate here as we move into Q2 But as we move into the second half of the year, we expect you know stronger sales growth in Opto
Speaker Change: In terms of the margin, the margin impact on Opto, similar to security in some sense, was impacted by FX.
Speaker Change: Notable FX hit in Opto. Outside of that, our operating income in Opto increased as well. So we would expect to see improved operating profits in the Opto business, particularly as we hit the back half of the year as well.
Speaker Change: Got it. Thanks for all the call. I appreciate it and good luck again, Deepak. Thanks.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you and our next question comes from the line of Christopher Glenn from Oppenheimer. Your question please.
Christopher Glenn: Thanks. First off, Deepak, congratulations on your
Christopher Glenn: pending transition and the success of the company here.
Christopher Glenn: I had a question on the opto segment. Are you seeing any end markets as you try to look through?
Christopher Glenn: you know, re-shoring, near-shoring, and inventory adjustments, which, you know, that pattern must be getting a little long in the tooth. You see any actual, like, end-demand or customer production start to see any cyclical recovery?
Speaker Change: Well, if I understand your question, we don't see any end of any of our big products in Opto. Is that what the question is? No, no, no, sorry, the end markets. Any end markets starting to move favorably from a cyclical perspective.
Speaker Change: Good luck.
Alan Edrick: Yeah, we are, you want to answer, I didn't understand it. Sure, sure. Chris, this is Allen. Yeah, we are seeing some strength in defense.
Allen: So we're seeing some strength in the defense markets, maybe some continued softness in the medical markets with OEMs, but overall probably strength in the defense and the other markets being a bit more neutral.
Allen: Just to add on, now that I understand it.
Allen: Again, even in the Opto area, we have a very good...
Deepak Chopra: Edrick, Deepak Chopra
Deepak Chopra: for various defense equipment that is being asked for in these places. So we look at it that our Opto defense business has seen some good pipeline growth and looks like good forecast going forward.
Speaker Change: Great, thank you for that and on the putting the acquisition aside on the organic
Speaker Change: component of the raised revenue guidance. Is that more reflecting the, you know, pacing of Mexico or the other international or some of the activity on the the normal kind of shorter lead time projects?
Speaker Change: Sure Chris, good question. This is Alan. It's really more on the other part of the business. I wouldn't say any of our increase really relates to Mexico. It's it's much more the other strong business that we do you know throughout the world in our various product lines in the security business.
Christopher Glenn: Great, thank you, that's all I've got.
Speaker Change: Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. Our next question comes from the line of Jeff Martin from Roth Capital Partners. Your question please.
Jeff Martin: I wanted to dive in a little more on aviation. It was interesting that you talked about remote monitoring capabilities. Do you see that being a near-term driver or is that more of an intermediate to longer-term driver?
Speaker Change: I think it's a question of intermediate to longer term. We have some pilot projects already in the making.
Speaker Change: And just like what we did in the cargo side and the turnkey business, these kind of products take some time.
Speaker Change: and we've had we had a control room that we are doing remote monitoring of the employee screening we are looking at some talking to some airports
Speaker Change: for Hair Employee Screening. So the answer is it's a longer term and again we think that this is a good potential and we are we are capable of doing it. We have the strength and the technology behind it learning from the cargo side.
Speaker Change: So that this looks like a good product to go after.
Speaker Change: Okay, and then with respect to the RF technology acquisition, help us understand
Speaker Change: Strategically, how RF fits into your existing product line? How much market opportunity this might open up? And, you know, is this something that you felt was
Speaker Change: lacking within your product portfolio that you needed to pursue and then secondarily could you just generally comment on the M&A environment if there's
Speaker Change: And acceleration potentially forthcoming for OSI. I know you've been opportunistic with your M&A historically, but just curious if you expect M&A to be a more prominent contributor in the next couple of years here.
Speaker Change: Good question, yep. Trustee Ansley, your first question.
Speaker Change: This particular acquisition was a product line that is not in our other products. We looked at that as a complementary because we cater to the same customers, both domestically and internationally.
Speaker Change: So we've looked at it and said this technology fits very well into a broader portfolio.
Speaker Change: so that we can offer a broader service.
Alan Edrick: Edrick Chopra
Alan Edrick: So this fitted very well into it that we could go back and go to a broader base.
Alan Edrick: They are in certain customers where we think that now that we are in that, we can sell some of the other products that we have into the same customer base. So that way, it gives us what we call 1 plus 1 is more than 2, and we can go grow the business as it grows.
Speaker Change: Thank you for that. With respect to the second part of that question, M&A going forward, you know, it seems like you've got significant potential to layer and leverage in the model from both the sales and manufacturing side of things. Is that something you perceive being a more prominent contributor going forward?
Speaker Change: You know, we've always looked at it, like Alan mentioned, we have a good, strong balance sheet. We have a very big focus to look at it, but we are very selective.
Speaker Change: We continue to look at it. Are there opportunities?
Speaker Change: We are not going to say which specifically, but we keep looking at a broader area all the time. And to answer your question, focus is going to be more focused on the security side than the other side, but we also look at the other side.
Speaker Change: Thank you.
Speaker Change: Great. And then last one for me, Alan, if you could comment a little more detail on the, you know, guidance relative to maybe a shift, push to the right of your pre-cash flow expectations. I mean, you do have significant working capital to unwind here. But, you know, just curious if you can quantify perhaps the EPS impacts.
Speaker Change: current guidance versus previous guidance with respect purely to the interest expense.
Alan Edrick: Yeah, good question, Jeff. I would say that there was probably a...
Alan Edrick: 5 to 10 cent impact to the additional borrowings and the cash flow moving a little bit to the right to our overall EPS guidance that we just provided which compared to what we provided in our previous call.
Speaker Change: Very helpful. Thank you so much.
Speaker Change: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Deepak Chopra for any further remarks.
Deepak Chopra: I want to thank everybody for listening to us and I want to thank all the employees and our customers for trusting in us and I'm looking forward to continued growth and I'm there to support the management of OSI.
Deepak Chopra: Thank you.
Speaker Change: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Speaker Change: Christopher Glynn, Jeffrey Martin, Josh Nichols, Michael Nichols Christopher Glynn, Jeffrey Martin, Josh Nichols, Michael Nichols, Michael Nichols, Michael Nichols